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Renewed political turmoil while IMF concludes fourth programme review

Event

Last week, the IMF completed the Fourth Review of Tunisia’s Extended Fund Facility and made around USD 250 million available under Tunisia’s four-year USD 2.9 billion economic programme. In order to comply with IMF conditionality, the government has continued the economic reforms by taking action in further reducing subsidies, for example, in the energy sector. Additionally, political turbulence has been on the rise. Specifically, a split has arisen between prime minister Youssef Chahed and his own secular Nidaa Tounes party. First, in mid-September the prime minister’s party membership was suspended, after which the son of the president and leader of the Nidaa Tounes party called for the dismissal of the prime minister. This call was supported by Tunisia’s powerful UGTT union that rejects the economic reform measures proposed by the current government.

Impact

Since 2016 Tunisia has been governed by a unity government headed by prime minister Youssef Chahed from the secular Nidaa Tounes party. It won the 2014 legislative elections and has strong links to the former political and economic elite. Later that year the party’s founder Beji Cais Essebsi was elected president. The other main party currently in the coalition is the moderate Islamist Ennahda party. The unity government is a consensus-seeking alliance between nine political parties and the largest trade unions, which grew out of the July 2016 Carthage agreement. Under this agreement, participating parties agreed to work together on a number of broad priorities such as reducing unemployment and combatting terrorism – though without specifying exactly how this would be implemented. Up to now, the coalition has worked together to implement the reforms required in light of the IMF programme. However, opposition against fiscal consolidation measures has increased over time. In the beginning, it was mainly the population and trade unions that protested against the reforms, but recently the Nidaa Tounes party has joined in.

The party claimsed that prime minister’s economic policies failed to revive the economy. For its part, the Ennahda party defended Chahed’s position, indicating that the departure of the prime minister would hit political stability at a time when the country needs to implement economic reforms. In response, the current president and founder of the Nidaa Tounes party put an end to his collaboration with the Ennahda party. Nidaa Tounes party’s decision to withdraw support for the prime minister should however be seen in the light of the upcoming presidential and legislative elections of November 2019, the party being afraid of losing to the Ennahda party.

Current political turmoil is not expected to lead to the toppling of the government given that the prime minister has sufficient support to avoid a vote of confidence. Nevertheless, the present rift weakens the government’s ability to implement further reforms. In general, it is expected to lead to reduced support for the government reform programme and to increased social tensions. For the last two years Chahed’s government has implemented austerity measures and structural reforms. Broad political support for these measures has proved important in the past given the strong opposition from the population and from the trade unions. In the light of the current IMF programme and in order to bring the external and public debts on a sustainable footing, the government has planned further reductions of the energy subsidies in October and November, limits on public hiring, increased flexibility of the exchange rate and public-private partnerships in a number of sectors. However, it is unsure whether the government will be able to deliver on all of these promises.

The sustainability of the country’s public and external debts could be impacted in case Tunisia would slow its reform pace and political turbulence would lead to fiscal slippages. These events could also lead to an increased adverse market sentiment towards the country, affecting therefore its ability to refinance its outstanding debt. The current situation puts further pressure on Credendo’s short-term political risk rating, which is currently in category 4 and Credendo’s medium- to-long-term political risk rating, which is currently in category 5.